This paper explains sectoral re-allocation as a factor underlying
the jobless growth for Pakistan by using aggregated employment data for
seven sectors of the economy over the time period 1967-2008. The
analysis employs four commonly used measures of sectoral reallocation
proposed by Lilien (1982), Groshen and Potter (2003), Rissman (1997),
and Aaronson, Rissman, and Sullivan (2004). Recent changes in the use of
capital-based foreign technology have resulted in substitution of labour
with non-labour inputs. Employment shifts between industrial sectors are
often witnessed as indicators of structural change in an economy. The
findings of this paper suggest that the economy of Pakistan underwent
structural changes during the periods of recession and recovery. It
appears that the structural changes were more pronounced around the time
of the 1969 recession than that of 1991. A plausible explanation for
this result might be the significant shifts in employment from
agriculture towards the services sectors. It is concluded from evidence
that sectoral reallocation is one of the major causes of the jobless
growth in Pakistan.

The present paper discuss the nature of structural changes in
employment to understand jobless growth in Pakistan for the period
spanning over 1967-2008. In our work (elsewhere) (1) analysing Pakistan
at sectoral level to find underlying factors generating jobless growth,
we found that Jobless growth in manufacturing sector was anticipated.
Industrial sector has a significant importance in any economy across the
glob. Recent changes in the use of capital--based foreign technology has
resulted in substitution of labour with non-labour inputs such as
capital. Employment shifts between industrial sectors are often
witnessed as indicators of Structural change in an economy. In this
paper we are more interested in the nature of structural change that
took place in Pakistan economy over 1967-2008. We set to analyse four
commonly used measures of sectoral reallocation proposed by Lilien
(1982), Groshen and Potter (2003), Rissman (1997), and Aaronson, Rissman
and Sullivan (2004). Findings of our work are suggesting that the
economy of Pakistan underwent structural change during periods of
recession and recovery. However, it does appear that structural changes
were more pronounced at the time of 1969 recession than that of 1991
recession. A plausible explanation for this result might be significant
shifts in employment from agriculture towards services sectors. We
conclude, based on the evidence from our study, that sectoral
reallocation is one of the major causes of jobless growth in Pakistan.

The rest of the paper is as structured as follow: Section 1
discusses the structural shift in the Pakistan economy and also compares
it with some developed and developing countries especially in term of
employment by economic activity. Based on past literature four commonly
measures of sectoral reallocation are identified in Section 2 provides a
brief review of the relevant literature. Estimation methodology and
results are reported in Section 3 while section four concludes the paper
along with drawing some policy lessons.

1. STRUCTURAL SHIFTS IN THE ECONOMY

The structural adjustments across the growth trajectory have been
studied at extent in literature documenting past experience of the
industrial country over two centuries. Generally, the growth patterns of
today's industrial countries can be marked by three diverse stages:
an initial stage with agriculture being the powerful sector of the
economy, an intermediate stage dominated by industrial sector and a
final stage with services sector leading the growth process. The timing
and length of different stages of structural change are different across
these countries. The industrial sector accounted for 50 percent of total
output at the climax of structural change and in later stage this share
declined to 25 percent for these countries.

Employment by Economic Activity

Things look clearer when put in comparison to each other. The
dynamics of sector wise employment in Pakistan can be easily grasped
when compared with other developed and developing countries. Tables 1(a)
and 1(b), given below, depict the share of employment by economic
activity of selected developed and developing countries respectively.

As is evident from the tables below, employment share by economic
activity, share of employment in agriculture sector is very low in
developed countries as compared to developing countries. In 1980
employment share of agriculture in developing world, on average, is
above 50 percent almost in all countries and in 2005 it decreases to 40
percent. On the other hand, in developed countries, agriculture sector
share of employment falls from less than 10 percent and below 5 percent
from over the same period. Same patterns are registered for industry
sector for developing and developed economies. While employment share of
Services sector for developed countries increased from 55 percent above
70 percent during 25 years comprising 1980-2005.

On the contrary, service sector share in total employment is 30
percent and increased to 40 percent in 2005 in developing countries. As
is evident from Table 1(b) agriculture sector contributes more than half
of total employment for developing countries. Worth mention, however, is
that countries with large share of employment in agriculture sector are
prone to jobless growth.

As we noted in Table 1 (a) that in developed countries, such as,
Europe, North America and Oceania, the share (also in absolute term) of
agriculture employment was continuously decreased. According to Fei and
Renis (1976), this is an important turning point in the process of
structural change and without any additional labour input, this
agricultural productivity growth is sufficient to sustain the food
supply of growing numbers of peoples. On the contrary, Table 1 (b) show
the different pattern of agriculture employment in many developing
countries and share of agriculture employment continuously declined,
even though in absolute term the numbers of jobs has continued to
increase in agriculture sector. (2)

On the other hand, developed and developing countries show the
typical pattern of employment in industrial sector. Relative share of
employment in industrial sector steadily increased in developing
countries, whereas in developed countries this share reached its highest
point. Whereas, on the last stage of structural change in the economy,
as Kuznets (1965) said that "the shift of employment towards
services can be stated as a stylised fact of the post war economic
development" shift of employment to services is a very diverse
process. Firstly, in general services is a major contributor to economic
growth, secondly, services can also arise as a result of the rise of the
welfare state and finally, employment growth in the service sector can
result from a lack of productivity growth in the rest of the economy. As
one argument given by Baumol (1967) that "there are inherent
problems of increasing productivity growth in services".

2. LITERATURE REVIEW

Structural change in the labour market, also called sectoral change
or reallocation, is said to occur in a labour market when there are
changes in the composition of aggregate demand for goods and services,
or when there are changes in the productivity of labour, that result in
an industrial shift in labour demand. When the labour market is
undergoing structural change, workers may lose jobs because their
current skills are no longer in demand. Hence, if an economic growth is
accompanied by structural change, there is a potential for this growth
to be jobless.

This possible explanation of jobless growth in the United States
was first suggested by Aghion and Howitt (1994) and then later
empirically studied by Rissman (1997), Groshen and Potter (2003) and
Aaronson, et al. (2004). They claimed that a substantial percentage of a
dismissal of employees can be recognised to permanent rather than
short-term. Permanent dismissals of employees are a feature of
structural unemployment as industries fade away. They explained that
indicative of structural change are industries that continue to lose
jobs after having lost jobs during the last recession or industries that
continue to gain jobs after having gained jobs during the last
recession. Exactly what is driving the structural change, however, is
not clearly established. One explanation might be the relative position
of the US in the international economy. Indeed, Bernanke (2003)
suggested that trade might be a factor that accounts for the change.
When there is stronger structural change, as observed in the last decade
and discussed above, labour market search and matching institutions
become important in helping to match the supply of vacancies to the
demand for labour through job searches by the unemployed [other labour
market institutions, such as the type and length of labour contracts,
are also important, see also Okun (1962)]. On the other hand when there
is a weak structural change, economic agents should look to set up
forward and backward linkages between various sectors of the economy.

Some studies have also examined the relationship between sectoral
changes and business cycles. These studies, including Lilien (1982),
Abraham and Katz (1986), Davis (1987), Loungani, Rush, and Tave (1990),
Campbell and Kuttne (1996) and Baily, Bartelsman and Haltiwanger (1998),
analyse the cyclical behaviour of both components of sectoral
reallocation, within the plant and across the plant and found that
changes in productivity are counter cyclical. On the other hand, Bar
Levi (1998) looks at how incentives for workers to wait until recoveries
to start looking for new jobs can impart a pro-cyclical bias to labour
productivity. While Merz (1995), Andolfatto (1996), and Den Haan, Ramey,
and Watson (2000) investigate that how reallocation can intensify and/or
transmit aggregate shocks.

Lilien (1982), along with Rissman (1997) and Aaronson, et al.
(2004), is prominent work on measure of sectoral reallocation. All these
studies measure the dispersion across industrial sectors. Groshen and
Potter [Pakistan (2003)], another most cited study in the recent
literature, measure GP statistic on the basis of cross correlation
across sectors in the phases of business cycle and "identify
sectoral reallocation as the cause of the recent jobless growth".
But Aaronson, et al. (2004) criticised on the GP statistic that
"the correlation between employment growth rates during and after
recessions--is a particularly close proxy for sectoral
reallocation".

3. MEASURES OF SECTORAL REALLOCATION: PAKISTAN'S ECONOMY

If economic growth is accompanied by structural changes in the
economy, workers may have to retrain and update their skills. Hence,
some unemployment may occur in the economy thereby weakening the
relationship between employment and GDP growth rates. Structural change
of an economy is often proxide by employment shifts between industrial
sectors. An in-depth analysis of structural change in the economy
requires disaggregated employment data within each of the seven sectors
identified in Appendix Table A1. Unfortunately, such disaggregated data
are not available. Hence, only some broad patterns of sectoral change
are analysed for the present study.

Four measures of structural change in the economy are commonly used
in the literature. These measures have been proposed by Lilien (1982),
Groshen and Potter (2003), Rissman (1997), and Aaronson, Rissman and
Sullivan (2004) and are discussed below. The measure proposed by Groshen
and Potter (GP) is discussed first. Because of the similarities between
the other three measures, they are discussed after the GP measure.

Groshen and Potter's (GP) Measure

Following Groshen and Potter (2003), industrial sectors that
continue to experience slower than average employment growth during and
after recession as well as the sectors that continue to experience
faster than average employment growth during and after recession can be
considered as undergoing structural change. The statistic suggested by
these authors, the GP statistic, measures the percentage of such sectors
in all sectors of the economy. In present study, we analyse
Pakistan's economy at sectoral level divided into seven sectors.
(3) Guided by data limitations annual data are used for each
sector's employment, although it will be preferable to use monthly
data but they are not available.

Employment growth rate in each sector is compared with the average
employment growth rate during different phases of the business cycle as
shown in Table 2. (4) The signs of sectoral changes concluded in columns
(11) and (12) are for the start of recessionary and recovery periods as
they are for one year after peak and trough. To account for any
randomness in employment fluctuations that could affect employment
growth in these years, employment changes in peak and trough are also
compared (over an entire half cycle) and signs of sectoral change
concluded in columns (9) and (10). To help the intuition of the reader,
an example is provided in the notes below Table 2.

From Table 2 it can be seen that when one compares employment
growth rates from one year into recession to one year into recovery (one
year after peak and one year after trough as reported in columns 11 and
12), the effect of structural change in the economy appears somewhat
less pronounced in the 1969-70 recession than it was in the 1991-92
recession. During the 1969-70 recession, a sectoral employment change
was observed in four sectors while this was the case in five sectors
during the next recession. Electricity, water and sanitary sectors did
not experience any structural shift, collectively. If one considers
employment growth rates over the half business cycle (in peak and trough
as reported in Columns 9 and 10), then the structural shifts are found
to be even less pronounced during 1969-70 as this occurred only in three
sectors. However, the electricity, water and sanitary sector does show
structural shift under this method. Only the transport and communication
sector is found to have experienced structural shifts under both methods
during both recessions. All other sectors show mixed results. (5)

While one weakness of the above analysis is its use of aggregated
data, another weakness is that it is based on only four data points
which may not capture full fluctuations in employment during the period.
Other measures such as those provided by Lilien (1982), Rissman (1997)
and Aaronson, et al. (2004) are improvements over the GP measure. All
three measures consider deviations of annual employment from a standard
level, but differ in the measurement of this deviation. These methods
are discussed next, followed by their results.

Lilien's Measure

Lilien (1982) holds that in the absence of structural change,
employment in all sectors will grow at the same rate. By contrast,
"when labour is being reallocated across industries, expanding
industries will grow faster than average and contracting industries will
grow slower". Lilien proposed a measure of structural change based
on the standard deviation of employment growth rates across industrial
sectors calculated as follows:

Where [GE.sub.it] is employment growth in sector i at time t,
[GE.sub.t] is the combined employment growth rate for all sectors or it
is the national average growth rate in employment, and Sit is the share
of total employment in sector i at time t. (6) If all sectors grow at
the same rate, Lilien's measure would be zero. The measure is
always positive and larger, the more an individual sector's
employment growth rate exceeds the average. The variable
[[sigma].sup.L.sub.t] is called the Lilien measure of structural change.

Some economists, such as Abraham and Katz (1986) have criticised
the Lilien measure. (7) They note that employment growth in some
sectors, such as the commodity-producing sectors, typically declines
faster during economic downturns than employment growth in
service-producing sectors, even if there is no actual impact of this
change on aggregate employment. Consequently, sectoral change as
measured by Lilien captures both the process of sectoral change and the
normal employment flows of the business cycle. The measure does not tell
us which sector is positively or negatively affected by recession or
recovery.

Rissman Measure

Rissman (1997) tried to incorporate Abraham and Katz's
criticism of the Lilien's measure. The Rissman measure is based on
a decomposition of the time series of sectoral employment share growth
rates into three components. The first component reflects the long-term
growth trend of employment in each sector. The second component, as
noted by Abraham and Katz (1986), is the predictable movement of
employment into and out of certain industries over the business cycle.
The third component is the unexpected movement (which Rissman calls
idiosyncratic shocks) of workers across sectors or industries, i.e.,
changes across sectors that occur for reasons distinct to business
cycles or long-term secular reasons.

Similar to Lilien (1982), Rissman proposed a measure of sectoral
change based on the estimates of idiosyncratic shocks, [[??].sub.it].
Specifically,

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

The term [[??].sub.it-1] is sector i's acyclic employment
share at time t-1. This employment share is hypothetically what the
sector's employment share would have been if the national
employment cycle were held constant at a value of zero, i.e., national
employment was stagnant. The acyclic employment share would depend only
on the sector's long-term trend and i.e., random, idiosyncratic
shocks. The [[??].sub.it]'s are estimates of the idiosyncratic
shocks for each sector obtained from the H.P filter estimation exercise.

Aaronson, Rissman and Sullivan Measure

Aaronson, Rissman and Sullivan (2004) provide a broader measure of
sectoral change that includes long-term change in a sector employment
share [[??].sub.i] separately as a sectoral shift. Their measure is
given by:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

The above measure calculates variations in the composition of
sectoral employment growth that are unrelated to the normal shifts that
occur as the result of business cycle. Figure 1 plots the above three
measures of structural change obtained for Pakistan's economy. The
data are provided in Appendix Table A2.

Annual dispersions in sectoral employment, using the above three
measures, are provided in Figure 1. Lilien's method shows that
sectoral employment growth deviations around the national growth have
been positive in all years indicating that Pakistan's economy has
been experiencing structural changes in all years. However, the measure
did not show a systematic pattern until 2003. It dropped during the
1969-70 recession while it rose during the 1991-92 recession indicating
more pronounced structural changes during the later recession.

[FIGURE 2 OMITTED]

The other two measures of employment dispersion are lower because
of the way they are measured. These two measures also indicate an
overall structural change in the economy, although the evidence is weak
in recent years. Hence, it may be concluded that structural changes did
take place during the two recovery periods in Pakistan. Finally, the
data plotted in Figure 1 show that all three measures of structural
shift are sensitive to business cycles.

A summary of the three measures of sectoral change is provided in
Table 3. On average, more employment shifts took place between sectors
during the ten years of first recession as was also true for the first
recovery period.

4. CONCLUSION

In the present study, three measures of sectoral reallocation show
identical results in recession and recovery. The 1969-70 recession and
recovery was very much affected by sectoral reallocation as compared to
the 1991-92 recession and recovery. An examination of employment by
industrial sectors in Pakistan shows that the structural change taking
place in the Pakistani economy is not necessarily benefiting the bulk of
workers who lack decent employment. (8) This evidence indicates
significant sectoral reallocations in Pakistan.

In conclusion, the analysis of structural change based on
aggregated employment data for seven sectors of the economy yields some
mixed results. This result is largely due to significant shifts in
employment from agriculture towards services sector as recorded in GP
method. The GP method also recorded significant changes in the transport
sector. The "Yellow Cab" scheme introduced in the mid-1990s by
the regime of former Prime Minister Nawaz Sharif, which made it easier
for investors in transport sector to import vehicles from abroad, may
have caused an expansion of this sector.

Some policy lessons can be drawn from the findings of our study.
Expansion of industrial sector and a gradual shift of workforce from
agriculture sector to industrial sector can reduce jobless growth
vulnerability for Pakistan. Well coordinated labour policy based on
market driven demand of skills with a focus on targeted areas of economy
as leading growth sector can be identified. The areas having greater
absorption capacity can lead the path to avoid or minimise jobless
growth. A continuous skill enhancement, trainings of labour force,
especially involved in traditional sectors of economy, matching with
market driven skill demand minimises the fluctuations in employment
status hence lessens chances for jobless growth. Labour intensive sector
lead growth recoveries can avoid jobless growth remarkably and this is
especially relevant for countries like of Pakistan with surplus
labour-especially so in agricultural sector.

In summary, the different measures show that the economy of
Pakistan underwent structural change during periods of recession and
recovery. However, there is an indication of stronger structural changes
in the 1970s than in other periods. In conclusion, there is sufficient
evidence to suggest that sectoral reallocation in Pakistan during
1968-1985 was a main cause of the jobless growth during that period.
When more disaggregated data are available, one can perform an in-depth
analysis of employment shifts within each of the seven sectors to
investigate if these shifts caused production in each sector to become
more or less capital intensive.

(4) When monthly data are used, GP's measure is based on a
recession period that starts one month after the business cycle peak and
an 11-month post-recession period that begins the month after the
business cycle trough.

(5) Groshen and Potter (2003) also provided a descriptive statistic
based on the correlations between the difference of employment growth
rate in each sector from the national average before and after
recession. This statistic will not be meaningful for present study due
to small number of observations (only seven).

(6) A sector's employment growth is related to its share of
employment by the following mathematical relationship: [DELTA]Ln
([S.sub.it]) = [DELTA]Ln ([E.sub.it]/[E.sub.t]) = [GE.sub.it] -
[GE.sub.t].

(7) The findings of Abraham and Katz (1986), Loungani, Rush, and
Tave (1990) and Rissman (1993, 1997) contrast with Davis and Haltiwanger
(1992) who find that 99 percent of reallocation is within 2-digit
industries and 88 percent within 4-digit industries. Davis and
Haltiwanger emphasise the importance of within-sector reallocation to
avoid Abraham and Katz's (1986) criticism of Lilien (1982). By
definition, differential responses of sectors to common shocks cannot be
responsible for the correlation of within sector reallocation with the
cycle. The difference between the Davis and Haltiwanger measures of
across-industry reallocation and the results presented here owe to
temporary reallocation. Davis and Haltiwanger compute reallocation as
the sum of job creation and job destruction, and this includes many
short-term job flows. Thus, while temporary reallocation is
overwhelmingly a within-sector phenomenon, permanent reallocation is
not.

(8) Some estimates suggest that employment in the informal economy
increased from 66 per cent of nonagricultural employment in 1999-2000 to
72 per cent in 2007. During the same period, wage and salaried
employment increased by not more than 1.7 percentage points of the
employed, while the number of self employed workers decreased by more
than seven percentage points. The percentage of the employed working
excessive hours declined slightly, but only because the percentage of
females in total employment had increased. The percentage of male
workers working excessive hours rose to more than 47 percent (Pakistan
Employment Trends, No. 2, 2007).